UNITED STATES

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D. C. 20549 

 

**FORM 10-QSB**

 

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE 

SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended: September 30, 2007 

 

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE 

SECURITIES EXCHANGE ACT OF 1934 

For the transition period from ____________ to ____________

 

*Commission File Number:  000-30771*

 

**INTERACTIVE MOTORSPORTS AND**

**ENTERTAINMENT CORP.**

(Exact name of registrant as specified in charter) 

 

Indiana

(State or other jurisdiction of incorporation or organization) 

 

35-2205637

(I.R.S. Employer I.D. No.) 

 

5624 West 73rd Street, Indianapolis, Indiana 46278

(Address of principal executive offices)

 

(317) 295-3500

(Registrant's telephone number, including area code)

 

Indicate by checkmark whether the Issuer: (1) filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of October 18, 2007, there were 98,999,788 (par value $0.0001) common shares issued and outstanding.

 

Transitional Small Business Disclosure Format (Check one).  Yes o Nox

 

DOCUMENTS INCORPORATED BY REFERENCE:  Exhibit Index on page 25.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1

 

**INDEX TO QUARTERLY REPORT ON FORM 10-QSB**

 

 

PAGE

NUMBER

SECTION

 

**PART I**

 

| ITEM 1. | Unaudited Condensed Financial Statements and Notes to Financial Statements |
|---------|----------------------------------------------------------------------------|

|   | Consolidated Balance Sheets at September 30, 2007 and December 31, 2006 | 3 |
|--------|-------------------------------------------------------------------------|---|

|   | Consolidated Statements of Operations for the Three Months Ended |
|--------|------------------------------------------------------------------|

|   | September 30, 2007 and 2006 | 5 |
|--------|-----------------------------|---|

|   | Consolidated Statements of Operations for the Nine Months ended |
|--------|-----------------------------------------------------------------|

|   | September 30, 2007 and 2006 | 6 |
|--------|-----------------------------|---|

Consolidated Statements of Changes in Shareholders’ Deficit for the Period Ended

|   | September 30, 2007 and December 31, 2006 | 7 |
|--------|------------------------------------------|---|

|   | Consolidated Statements of Cash Flows for the Nine Months |
|--------|-----------------------------------------------------------|

|   | Ended September 30, 2007 and 2006 | 8 |
|--------|-----------------------------------|---|

|   | Notes to Consolidated Financial Statements | 10 |
|--------|--------------------------------------------|----|

| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
|---------|--------------------------------------------------------------------------------------------|----|

| ITEM 3. | Internal Controls and Procedures | 21 |
|---------|----------------------------------|----|

 

 

**PART II**

 

| ITEM 1. | Legal Proceedings | 22 |
|---------|-------------------|----|

| ITEM 2. | Changes in Securities | 22 |
|---------|-----------------------|----|

| ITEM 3. | Defaults Upon Senior Securities | 22 |
|---------|---------------------------------|----|

| ITEM 4. | Submission of Matters to a Vote of Security Holders | 22 |
|---------|-----------------------------------------------------|----|

| ITEM 5. | Other Information | 22 |
|---------|-------------------|----|

| ITEM 6. | Exhibits and Reports on Form 8-K | 23 |
|---------|----------------------------------|----|

 

 

| SIGNATURES | 24 |
|------------|----|

 

| EXHIBITS INDEX | 25 |
|----------------|----|

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Balance Sheets

 

 

**PART I**

 

**ITEM 1. CONDENSED FINANCIAL STATEMENTS** 

 

**ASSETS**

 

 

|                                                                       |   | *September 30, 2007***  |     |     | *December 31, 2006*** |
|----------------------------------------------------------------------------|--------|-------------------------|----------|----------|-----------------------|
|                                                                       |   | ***(**Unaudited**)***** | * * | * * | *(Audited**)*****     |
| Current Assets                                                             |   |                    |     |     |                  |
| Cash                                                                       | $      | 133,635                 |     | $        | 216,323               |
| Accounts Receivable, Net of $238,781

allowance and $238,781, respectively |   | 249,234                 |     |     | 229,506               |
| Inventory                                                                  |   | 323,665                 |     |     | 254,322               |
| Prepaid Expenses                                                           |   | 62,007                  |     |     | 22,724                |
| Notes Receivable                                                           |   | 10,427                  |     |     | 3,143                 |
| Total Current Assets                                                       |   | 778,968                 |     |     | 726,018               |
|                                                                       |   |                    |     |     |                  |
| Property and Equipment                                                     |   |                    |     |     |                  |
| Total Property and Equipment, Net                                          |   | 626,671                 |     |     | 885,711               |
|                                                                       |   |                    |     |     |                  |
| Other Assets                                                               |   |                    |     |     |                  |
| Deposits                                                                   |   | 90,272                  |     |     | 28,471                |
| Notes Receivable                                                           |   | 296,807                 |     |     | 305,642               |
| Total Other Assets                                                         |   | 387,079                 |     |     | 334,113               |
|                                                                       |   |                    |     |     |                  |
| Total Assets                                                               | $      | 1,792,718               |     | $        | 1,945,842             |

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Balance Sheets (Continued)

 

 

**LIABILTIES AND SHAREHOLDERS’ EQUITY (DEFICIT)**

 

 

|                                                            |     | *September 30, 2007*** |     |     | *December 31, 2006*** |
|-----------------------------------------------------------------|----------|------------------------|----------|----------|-----------------------|
|                                                            |     | *(Unaudited)***        |     |     | *(Audited)***         |
| *Current Liabilities***                                         | * * | * *               | * * | * * | * *              |
| Accounts Payable                                                | $        | 830,680                |     | $        | 581,281               |
| Accrued Payroll Expense                                         |     | 38,361                 |     |     | 66,762                |
| Accrued Sales Tax Payable                                       |     | 39,516                 |     |     | 34,360                |
| Gift Cert. & Customer Deposits                              |     | 30,293                 |     |     | 23,248                |
| Deposits on Simulator Sales                                     |     | 1,002,860              |     |     | 1,019,093             |
| Accrued Liabilities                                             |     | 443,456                |     |     | 432,745               |
| Notes Payable - Related parties                                 |     | 50,000                 |     |     | 146,000               |
| Notes payable                                                   |     | 1,829,123              |     |     | 1,539,795             |
| Total Current Liabilities                                       |     | 4,264,289              |     |     | 3,843,284             |
|                                                            |     |                   |     |     |                  |
| *Long-term Liabilities*                                         |     |                   |     |     |                  |
| Notes  payable                                                  |     | 1,720,396              |     |     | 1,957,471             |
|                                                            |     |                   |     |     |                  |
| Total Liabilities                                               |     | 5,984,685              |     |     | 5,800,755             |
|                                                            |     |                   |     |     |                  |
| *Shareholders’ Equity (Deficit)***                         | * * | * *               | * * | * * | * *              |
| Common Stock                                                    |     | 9,900                  |     |     | 9,640                 |
| Additional Paid in Capital                                      |     | 5,551,892              |     |     | 5,498,749             |
| Retained Deficit                                                |     | (9,753,759)            |     |     | (9,363,302)           |
| Total Shareholders’ Equity (Deficit)                       |     | (4,191,967)            |     |     | (3,854,913)           |
|                                                            |     |                   |     |     |                  |
| *Total Liabilities & Shareholders’ Equity (Deficit)*** | $**      | 1,792,718              | * * | $**      | 1,945,842             |

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Operations

(Unaudited)

 

 

|                                                 |   |   | *For the Three Months Ending*** |
|------------------------------------------------------|--------|--------|---------------------------------|
|                                                 |   |   | *September 30***                |
|                                                 |   |   | *2007***                        | * * | * * | *2006*** |
|                                                 |   |   |                            |   |   |   |
| *Revenues***                                         |   |   |                            |   |   |   |
| Company Store Sales                                  |   | $      | 475,203                         |   | $ | 531,856 |
| Revenue Share Sales                                  |   |   | 144,056                         |   |   | 77,462 |
| Simulator Leases                                     |   |   | -                               |   |   | 19,000 |
| Sales of Simulator Systems                           |   |   | 385,878                         |   |   | 292,708 |
| Special Event Sales                                  |   |   | 51,659                          |   |   | - |
| Total Revenues                                       |   |   | 1,056,796                       |   |   | 921,026 |
|                                                 |   |   |                            |   |   |   |
| *Cost of Sales***                                    |   |   |                            |   |   |   |
| COGS - Merchandise                                   |   |   | 6,118                           |   |   | 10,386 |
| Group Sales Expenses                                 |   |   | -                               |   |   | 1,759 |
| COGS - Sale of Simulators                            |   |   | 32,591                          |   |   | 86,400 |
| COGS – Special Events                           |   |   | -                               |   |   | 10,674 |
| Inventory Adjustments                                |   |   | (1,264)                         |   |   | - |
| Total Cost of Sales                                  |   |   | 37,445                          |   |   | 109,219 |
|                                                 |   |   |                            |   |   |   |
| *Gross Profit***                                     |   |   | 1,019,351                       |   |   | 811,807 |
|                                                 |   |   |                            |   |   |   |
| *General & Admin Expenses***                     |   |   |                            |   |   |   |
| Payroll Related Expenses                             |   |   | 350,506                         |   |   | 353,072 |
| Occupancy Expenses                                   |   |   | 275,322                         |   |   | 274,764 |
| Other Operating Expenses                             |   |   | 182,129                         |   |   | 350,384 |
| Total Operating Expenses                             |   |   | 807,957                         |   |   | 978,220 |
|                                                 |   |   |                            |   |   |   |
| *Operating Profit (Loss)***                          |   |   | 211,394                         |   |   | (166,413) |
|                                                 |   |   |                            |   |   |   |
| Interest Expense                                     |   |   | (172,103)                       |   |   | (151,172) |
|                                                 |   |   |                            |   |   |   |
| *Net Profit (Loss) before Income Tax Expense***      |   |   | 39,291                          |   |   | (317,585) |
|                                                 |   |   |                            |   |   |   |
| Income Tax Expense                                   |   |   | -                               |   |   | - |
|                                                 |   |   |                            |   |   |   |
| *Net Profit (Loss)***                                |   | $      | 39,291                          |   | $ | (317,585) |
|                                                 |   |   |                            |   |   |   |
| Net Profit (Loss) per share – basic and diluted |   | $      | 0.00                            |   | $ | (0.00) |
|                                                 |   |   |                            |   |   |   |
| Weighted Average Shares Outstanding                  |   |   | 98,858,360                      |   |   | 94,164,500 |
| Diluted Common Shares Outstanding                    |   |   | 111,224,860                     |   |   | 100,862,516 |

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statement of Operations

(Unaudited)

 

 

|                                        |   |   | *For the Nine Months Ending*** |
|---------------------------------------------|--------|--------|--------------------------------|
|                                        |   |   | *September 30***               |
|                                        |   |   | *2007***                       | * * | * * | *2006*** |
|                                        |   |   |                           |   |   |   |
| *Revenues***                                |   |   |                           |   |   |   |
| Company Store Sales                         |   | $      | 1,383,912                      |   | $ | 1,375,884 |
| Revenue Share Sales                         |   |   | 320,740                        |   |   | 236,451 |
| Simulator Leases                            |   |   | 6,333                          |   |   | 57,000 |
| Sales of Simulator Systems                  |   |   | 1,450,287                      |   |   | 1,823,883 |
| Special Event Sales                         |   |   | 160,160                        |   |   | 106,408 |
| Total Revenues                              |   |   | 3,321,432                      |   |   | 3,599,626 |
|                                        |   |   |                           |   |   |   |
| *Cost of Sales***                           |   |   |                           |   |   |   |
| COGS - Merchandise                          |   |   | 36,435                         |   |   | 16,666 |
| Group Sales Expenses                        |   |   | 819                            |   |   | 2,406 |
| COGS - Sale of Simulators                   |   |   | 539,262                        |   |   | 491,367 |
| COGS – Special Events                  |   |   | 41,769                         |   |   | 47,701 |
| Inventory Adjustments                       |   |   | 2,046                          |   |   | (2,223) |
| Total Cost of Sales                         |   |   | 620,331                        |   |   | 555,917 |
|                                        |   |   |                           |   |   |   |
| *Gross Profit***                            |   |   | 2,701,101                      |   |   | 3,043,709 |
|                                        |   |   |                           |   |   |   |
| *General & Admin Expenses***            |   |   |                           |   |   |   |
| Payroll Related Expenses                    |   |   | 1,056,160                      |   |   | 1,234,909 |
| Occupancy Expenses                          |   |   | 829,899                        |   |   | 839,222 |
| Other Operating Expenses                    |   |   | 744,103                        |   |   | 1,172,654 |
| Total Operating Expenses                    |   |   | 2,630,162                      |   |   | 3,246,785 |
|                                        |   |   |                           |   |   |   |
| *Operating Profit (Loss)***                 |   |   | 70,939                         |   |   | (203,076) |
|                                        |   |   |                           |   |   |   |
| Interest Expense                            |   |   | (461,396)                      |   |   | (400,452) |
|                                        |   |   |                           |   |   |   |
| *Net Loss before Income Tax Expense***      |   |   | (390,457)                      |   |   | (603,528) |
|                                        |   |   |                           |   |   |   |
| Income Tax Expense                          |   |   | -                              |   |   | - |
|                                        |   |   |                           |   |   |   |
| *Net Loss***                                |   | $      | (390,457)                      |   | $ | (603,528) |
|                                        |   |   |                           |   |   |   |
| Net Loss per share – basic and diluted |   | $      | (0.00)                         |   | $ | (0.00) |
|                                        |   |   |                           |   |   |   |
| Weighted Average Shares Outstanding         |   |   | 97,226,805                     |   |   | 93,902,399 |
| Diluted Common Shares Outstanding           |   |   | 111,366,288                    |   |   | 102,902,399 |

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Statement of Shareholders’ Deficit

(Unaudited)

 

 

 

 

|                                                             |   |   |         |   |   | Additional

Paid-In

Capital |   |   | Retained

Deficit |   |   | Total

Shareholders’

Equity (Deficit) |
|------------------------------------------------------------------|--------|--------|--------------|--------|--------|------------------------------|--------|--------|-------------------|--------|--------|---------------------------------------------|
|                                                             |   |   | Common Stock |   |   |                         |   |   |              |
|                                                             |   |   | Shares       |   |   | Amount                       |   |   |              |   |   |                                        |
| Balance at

December 31,

2006                                   |   |   | 96,397,506   |   | $      | 9,640                        |   | $      | 5,498,749         |   | $      | (9,363,302)                                 |   | $ | (3,854,913) |
|                                                             |   |   |         |   |   |                         |   |   |              |   |   |                                        |   |   |   |
| Warrant issued

for 2007 Note

Payable

(unaudited)              |   |   | -            |   |   | -                            |   |   | 11,403            |   |   | -                                           |   |   | 11,403 |
|                                                             |   |   |         |   |   |                         |   |   |              |   |   |                                        |   |   |   |
| Common stock

issued for

payment of

Loan Interest

(unaudited) |   |   | 2,602,282    |   |   | 260                          |   |   | 41,740            |   |   | -                                           |   |   | 42,000 |
|                                                             |   |   |         |   |   |                         |   |   |              |   |   |                                        |   |   |   |
| Net loss for the

Period ended

September 30,

2007

(unaudited) |   |   | -            |   |   | -                            |   |   | -                 |   |   | (390,457)                                   |   |   | (390,457) |
|                                                             |   |   |         |   |   |                         |   |   |              |   |   |                                        |   |   |   |
|                                                             |   |   |         |   |   |                         |   |   |              |   |   |                                        |   |   |   |
| Balance at

September 30,

2007

(unaudited)                     |   |   | 98,999,788   |   | $      | 9,900                        |   | $      | 5,551,892         |   | $      | (9,753,759)                                 |   | $ | (4,191,967) |

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

(Unaudited)

 

 

|                                                           |   |   | *For the Nine Months Ended*

*September 30*** |
|----------------------------------------------------------------|--------|--------|-----------------------------------------------|
|                                                           |   |   |
|                                                           |   |   | *2007***                                      |   |   | *2006*** |
|                                                           |   |   |                                          |   |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                           |   |   |                                          |   |   |   |
|                                                           |   |   |                                          |   |   |   |
| Net Loss                                                       |   | $      | (390,457)                                     |   | $ | (603,528) |
| Adjustments to reconcile net loss to net cash                  |   |   |                                          |   |   |   |
| used by operating activities:                                  |   |   |                                          |   |   |   |
| Depreciation and amortization                                  |   |   | 221,202                                       |   |   | 307,457 |
| Amortization of notes payable discount                         |   |   | 17,258                                        |   |   | 8,111 |
| Amortization of Dolphin Financing Agreement                    |   |   | (348,819)                                     |   |   | (300,510) |
| Common stock issued for interest                               |   |   | 42,000                                        |   |   | 60,000 |
| Net changes in operating assets and liabilities:               |   |   |                                          |   |   |   |
| (Increase) decrease in trade accounts and other receivable     |   |   | (18,177)                                      |   |   | 72,915 |
| Decrease in inventory                                          |   |   | 89,639                                        |   |   | 51,813 |
| (Increase) decrease in prepaid expenses and other assets       |   |   | (101,086)                                     |   |   | 37,887 |
| Decrease in intangibles                                        |   |   | (69,390)                                      |   |   | - |
| Increase (decrease) in accounts payable                        |   |   | 249,399                                       |   |   | (248,932) |
| Decrease in accrued payroll and payroll taxes                  |   |   | (28,401)                                      |   |   | (22,828) |
| Increase (decrease) in sales tax payable                       |   |   | 5,156                                         |   |   | (4,326) |
| Increase (decrease) in gift certificates and customer deposits |   |   | 7,045                                         |   |   | (4,721) |
| Increase in accrued expenses                                   |   |   | 10,712                                        |   |   | 18,306 |
| (Decrease) in deposits on simulator sales                      |   |   | (16,233)                                      |   |   | (347,983) |
|                                                           |   |   |                                          |   |   |   |
| Net Cash Used by Operating Activities                          |   |   | (330,152)                                     |   |   | (976,339) |
|                                                           |   |   |                                          |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                           |   |   |                                          |   |   |   |
|                                                           |   |   |                                          |   |   |   |
| Purchase of property and equipment                             |   |   | (69,390)                                      |   |   | (308,710) |
| Sale of property and equipment                                 |   |   | 17,637                                        |   |   | 29,437 |
|                                                           |   |   |                                          |   |   |   |
| Net Cash Used by Investing Activities                          |   |   | (51,753)                                      |   |   | (279,273) |
|                                                           |   |   |                                          |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                           |   |   |                                          |   |   |   |
|                                                           |   |   |                                          |   |   |   |
| Proceeds from issuance of notes payable                        |   |   | 475,000                                       |   |   | 1,166,181 |
| Payments of notes payable                                      |   |   | (175,783)                                     |   |   | (33,907) |
|                                                           |   |   |                                          |   |   |   |
| Net Cash Provided by Financing Activities                      |   |   | 299,217                                       |   |   | 1,132,274 |
|                                                           |   |   |                                          |   |   |   |
| DECREASE IN CASH                                               |   |   | (82,688)                                      |   |   | (123,338) |
|                                                           |   |   |                                          |   |   |   |
| CASH, BEGINNING OF PERIOD                                      |   |   | 216,323                                       |   |   | 353,180 |
|                                                           |   |   |                                          |   |   |   |
| CASH, END OF PERIOD                                            |   | $      | 133,635                                       |   | $ | 229,842 |
|                                                           |   |   |                                          |   |   |   |

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

 

|                                |   |   | *For the Nine Months Ended*

*September 30*** |
|-------------------------------------|--------|--------|-----------------------------------------------|
|                                |   |   |
|                                |   |   | *2007***                                      |   | * * | *2006*** |
|                                |   |   |                                          |   |   |   |
| SUPPLEMENTAL CASH FLOW DISCLOSURES: |   |   |                                          |   |   |   |
|                                |   |   |                                          |   |   |   |
| Cash paid for interest              |   | $      | 204,632                                       |   | $ | 54,479 |
| Cash paid for income taxes          |   | $      | -                                             |   | $ | - |
|                                |   |   |                                          |   |   |   |

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

9

 

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements

September 30, 2007 and December 31, 2006

 

NOTE 1 - BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated balance sheets of Interactive Motorsports and Entertainment Corp. (the “Company”) at September 30, 2007 and December 31, 2006 and the unaudited consolidated statements of operations and statements of cash flows for the nine months ended September 30, 2007 and September 30, 2006 have been prepared by the Company’s management and do not include all the information and notes to the financial statements necessary for a complete presentation of the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.  In the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.  Although management believes the disclosures areadequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s latest annual financial statements included in the Company’s annual report on Form 10-KSB.  The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007 or any future period.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 

|   | a. | Use of Estimates |
|--------|----|------------------|

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

|   | b. | Accounting for the Sale of Simulators |
|--------|----|---------------------------------------|

 

The Company records the sale of simulators using the percentage of completion method of accounting.  The percentage of completion for any given sales contract is determined by the ratio of costs incurred to date to the total estimated cost for each site build.  Costs incurred consist of purchased components, outside services, and outside contract labor cost.  

 

NOTE 3 - DEBT AND CREDIT ARRANGEMENTS

 

On February 2, 2004 and June 6, 2004, Perfect Line, Inc. issued notes bearing an interest rate of 9.6% payable in the total amount of $750,000.  Each note came with an option to purchase common shares of the Company equal to the amount of notes purchased divided by the fair market value of the Company’s stock on the date of issuance.  The notes became due on February 2, 2005, and $260,000 of the notes was paid in full at that time.  A note holder of an additional $344,000 of the notes elected to receive a cash payment of $16,000 and exercise options granted with the note purchase for full payment of the note per the terms of the 2004 Agreement.  The note holder of the final $146,000 in notes has been repaid $58,500 as of April 17, 2007, and the balance was assigned to two unrelated third parties, one in the amount of $75,000 and the other in the amount of $12,500.  The term of thenote was extended by 24 months, and the pre-payment terms were amended to reflect that there will be no pre-payment option, while all other terms remained the same, including the expiration of the option 30 days past the maturity date.

 

 

 

10

 

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements

September 30, 2007 and December 31, 2006

 

NOTE 3 - DEBT AND CREDIT ARRANGEMENTS (continued)

 

Pursuant to the Note and Option Purchase Agreement and Security Agreement dated November 2005 (“2005 Agreement”), the Company issued notes bearing an interest rate of 12% payable in the total amount of $122,500.  These notes were issued between October 13, 2005 and November 4, 2005.  Each note came with an option to purchase common shares of the Company equal to the amount of notes purchased divided by the exercise price of the option.  The notes were due on October 1, 2007, and the Company has asked the note holders to extend the note under the same terms until additional funding is in place.  The note holders have agreed to an extension as of the date of this notice, but there is no assurance that one or more of the note holders will demand payment.

 

The value of the options will be amortized to interest expense over their life which expires on November 1, 2007.  Amortization of option discount for the options related to the 2005 Agreement of $3,915 and $7,831 was included in interest expense for the nine months ended September 30, 2007 and the twelve months ended December 31, 2006, respectively.

 

On March 29, 2006, Perfect Line and MOAC Mall Holdings, LLC, the Mall of America landlord, agreed to a settlement agreement whereby Perfect Line signed a promissory note totaling $294,652 payable in five (5) quarterly installments, with the first payment of $78,471 made on February 28, 2006, and payments of $54,045 to be made beginning July 14, 2006 and ending July 15, 2007.  The $54,045 payments for 2006 were made on July 14 and November 15.  See Note 6, Subsequent Events.

 

On July 14, 2006, the Company entered into Note and Warrant Purchase and Security Agreements with ten (10) investors in a private placement which is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder.  The Notes, totaling $950,000,were issued by Perfect Line, will be fully paid down July 17, 2010, and bear interest at a rate of 16% per annum (increased from 15% on September 21, 2007) for the total interest amount over the four year period of $326,194.  The principle balance of the notes on September 30, 2007, is $723,530.  Each note came with an option to purchase common shares of the Company equal to two and one half times the amount of notes purchased divided by the exercise price of the option.  The principle and interest on the Notes are payable weekly over a four (4) year term and are secured by afirst security interest in 20 of the simulators owned by Perfect Line.

 

The value of the options will be amortized to interest expense over their life which expires on July 13, 2010.  Amortization of option discount for the options related to the 2006 Agreement of $11,385 and $6,958 was included in interest expense for the nine months ended September 30, 2007, and twelve months ended December 31, 2006, respectively.

 

On April 12, 2007, the Company entered into a Mutual Release and Settlement Agreement with Mall of Georgia, LLC.  The terms of the agreement released the Company from any future lease obligations at the site and set the financial settlement at $194,660, payable in six (6) installments between May, 2007 and May, 2008.  $95,580 is directly attributable to Perfect Line with the remainder of the note attributable to unpaid rent due from lease assignee, Checker Flag Lightning, LLC.  See Note 6, Subsequent Events.  The Company has filed a Motion for Partial Summary Judgment against Checker Flag Lightning, LLC in the amount of $357,352.  See Part II, Item I, Legal Proceedings for more details. 

 

 

 

11

 

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements

September 30, 2007 and December 31, 2006

 

NOTE 3 - DEBT AND CREDIT ARRANGEMENTS (continued)

 

On September 21, 2007, the Company entered into Note and Warrant Purchase and Security Agreements with ten (10) investors in a private placement which is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder.  The Notes, totaling $475,000, were issued by Perfect Line, will be fully paid down September 13, 2011 and bear interest at a rate of 16% per annum for the total interest amount over the four (4) year period of $167,477.  The principle balance of the notes on September 30, 2007, is $472,661.  Each note came with an option to purchase common shares of the Company equal to two and one half times the amount of notes purchased divided by the exercise price of the option.  

 

The value of the options will be amortized to interest expense over their life which expires on September 13, 2011.  Amortization of option discount for the options related to the 2007 Agreement of $0 was included in interest expense for the nine months ended September 30, 2007.

 

NOTE 4 - SIMULATOR SALE AGREEMENTS

 

The Company completed the sale of fourteen (14) Reactor simulators to DGI, Inc. for their Reactor Mobile Experiences in the first quarter of 2007, the sale of two (2) Reactor simulators to the George P. Johnson & Company in Auburn Hills, MI in the second quarter of 2007, and the sale of four (4) SMS simulators to Prime Time FEC in the third quarter of 2007.  A contract for the installation of four (4) SMS simulators (2 purchase and 2 revenue share) was signed for the Charlotte, NC market and a $90,000 deposit was made.  Installation is not expected until first quarter of 2008.

 

NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

In March of 2007, DGI, Inc., an Indiana corporation managed by and under majority ownership of William R. Donaldson, purchased fourteen (14) Reactor simulators for $574,000 from Perfect Line and subsequently leased the simulators to Sprint Nextel and Toyota.  Mr. Donaldson is the Chairman and Chief Executive Officer of the Company

 

NOTE 6 - SUBSEQUENT EVENTS

 

The Company has agreed to amended note and settlement agreements with two of its landlords, Mall of Georgia, LLC and MOAC Mall Holdings, LLC (Mall of America).  Having missed payments under the terms of earlier note and settlement agreements with both parties, the Company has negotiated terms for going forward.  Under the terms of the Mall of Georgia agreement, the balance due of $157,346 is to be paid in eight payments between December 15, 2007 and October 1, 2008.  Under the terms of the Mall of America agreement, the balance due of $310,553 is to be paid in seven payments between December 15, 2007 and October 1, 2008. 

 

 

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The terms “Company”, “we”, “our” or “us” are used in this discussion to refer to Interactive Motorsports and Entertainment Corp. along with Interactive Motorsports and Entertainment Corp.’s wholly owned subsidiary, Perfect Line, Inc., on a consolidated basis, except where the context clearly indicates otherwise. The discussion and information that follows concerns the Registrant as it exists today, as of this filing, including the predecessor of the Company’s operations, Perfect Line, LLC. 

 

**Information on Forward-Looking Statements**

 

This Form 10-QSB and other statements issued or made from time to time by the Company or its representatives contain statements, which may constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C.A Sections 77z-2 and 78u-5. Those statements include statements regarding the intent, belief, or current expectations of the Company and members of its management team as well as the assumptions on which such statements are based. All statements, trend analyses, and other information contained in this report relative to markets for the Company’s products and/or trends in the Company’s operations or financial results, as well as other statements which include words such as “anticipate,” “could,” “feel(s),”“believes,” “plan,” “estimate,” “expect,” “should,” “intend,” “will,” and other similar expressions, constitute forward-looking statements and are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions that may impact the disposable income and spending habits of consumers; (ii) the availability of alternative entertainment for consumers; (iii) the ability of the company to obtain additional capital and/or debt financing; (iv) the ability of the company to control costs and execute its business plan.

 

The reader is cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements are set forth herein. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. 

 

**Recently Issued Accounting Standards**

 

None

 

 

 

13

**History**

 

IMTS is headquartered in Indianapolis, Indiana. In June 2001, Perfect Line, LLC (d/b/a NASCAR Silicon Motor Speedway) was formed to purchase, for approximately $1.5 million, the assets of SEI, including intellectual property and the contents of 14 of the 15 NSMS racing centers, which included 170 simulators. SEI showed these assets on its books at approximately $30 million. In August 2002, Perfect Line became a wholly owned subsidiary of IMTS, through an exchange of shares that resulted in Perfect Line shareholders owning approximately 82% of IMTS equity. Simultaneous with this event, approximately $2.6 million in private equity financing was made available to Perfect Line. Approximately one-half the funding was used to retire the Company’s bank note and the balance was used for working capital.

 

In July of 2003, management began the process of revising the Company’s business model, changing the focus from the inherited Company owned and operated mall-based racing centers to revenue share, lease and purchased simulators for mall merchandise retailers, family entertainment centers, amusement parks, casinos, auto malls, etc., as well as for experiential mobile marketing programs such as the Nextel Experience and the DaimlerChrysler auto show exhibits.

 

In late 2004, the Company raised funds through debt financing and began manufacturing new SMS simulators in 2005 to meet the demand. In late 2005 it introduced the new Reactor simulator, a more portable, mobile and affordable model for the market.

 

Funding the operations through revenues from the business and through primarily debt financing, the Company has laid the groundwork for a focus on the experiential mobile marketing industry and the out-of-home, multi-site interactive gaming opportunity. A recent license with iRacing.com, owned by John Henry (principle owner of the Boston Red Sox), and David Kaemmer (co-founder of Papyrus Racing Games), owners of the Papyrus NASCAR Racing 2003, will potentially allow the Company to complete its modeling of the multi-player/multi-site virtual league gaming, although there can be no assurance that the project will be successful. 

 

**Overview**

 

Interactive Motorsports and Entertainment Corp. (“IMTS” or the “Company”), an Indiana corporation, is a world leader in race simulation. Operating through its wholly owned subsidiary, Perfect Line, Inc., the Company manufactures two versions of race car simulators and sells racing experiences to the public through revenue sharing and marketing agreements for the “out-of-home” interactive gaming market. The Company contracts with operators in malls, amusement parks, family entertainment centers, casinos, and with third parties for trade shows and mobile fan interactive experiences. Under team and track licenses from America’s fastest growing sport, NASCAR, simulator customers experience driving in a NASCAR race car that simulates the motion, sights and sounds of an actual NASCAR event. The Company owns and operates racing centers at the Mall of America in Minneapolis, MN,and at Universal CityWalk in Hollywood, CA. Each racing center features 12 simulators as well as a selection of popular NASCAR merchandise. The Company is positioning itself to be a world leader in the “out-of-home” multi-player/multi-site virtual league market, and the experiential mobile marketing industry.

 

The Company currently has two versions of racecar simulators, the SMS and the Reactor. In marketing these two products it leverages its strategic relationships and proprietary assets, which include sophisticated racing simulation technology (including 2 patents, and license agreements with NASCAR race tracks and race teams), to offer a unique and affordable race simulation experience.

 

The Company’s business strategy currently targets: 1) end customers in fixed site venues who are gamers and/or NASCAR enthusiasts, and 2) experiential marketing clients, including but not limited to NASCAR sponsors, who use the experience to draw attention to their product display and to collect potential customer data and drive them to a website. In addition, under a new multi-year proprietary software license agreement with iRacing.com, exclusive for the “out-of-home” race simulation category, the anticipated multi-player/multi-site virtual league offering is expected to engage the hardcore customers to compete in leagues and competitions on a regularly scheduled basis, although there can be no assurances.

 

 

14

Through strategic alliances the Company currently has access to over twenty retail locations nationally, as well as eight experiential mobile marketing units traveling around the country. IMTS plans significant growth in product placement to fully exploit the available fixed and mobile marketing venues both domestically and internationally, although there can be no assurances.

 

Perfect Line’s race simulators, including those owned by Race Car Simulation Corp., are currently featured in the following locations:

 

*Company Owned (24 Simulators):*

 

| *Location***              | *Year*** | *Market***      | *Sq. Ft.*** | *Simulators*** |
|---------------------------|----------|-----------------|-------------|----------------|
| *1)*   Mall of America    | 2001     | Minneapolis, MN | 5,899       | 12 SMS         |
| *2)*   Universal CityWalk | 2001     | Los Angeles, CA | 5,000       | 12 SMS         |

 

*Revenue Share (75 Simulators):*

 

| *Location***                               | *Year*** | *Market***            | *Sq. Ft.*** | *Simulators*** |
|--------------------------------------------|----------|-----------------------|-------------|----------------|
| *1)*    NASCAR SpeedPark                   | 2003     | Sevierville, TN       | 1,584       | 6 SMS#         |
| *2)*    NASCAR SpeedPark                   | 2003     | St. Louis, MO         | 1,496       | 6 SMS#         |
| *3)*    Bass Pro Outdoor                   | 2004     | Harrisburg, PA        | 500         | 2 SMS          |
| *4)*    Jordan Creek Town Center           | 2004     | Des Moines, IA        | 4,000       | 8 SMS          |
| *5)*    NASCAR SpeedPark                   | 2005     | Toronto, Canada       | 1,500       | 6 SMS#         |
| *6)*    Bass Pro Outdoor                   | 2005     | Clarksville, IN       | 750         | 3 SMS          |
| *7)*    NASCAR SpeedPark                   | 2006     | Myrtle Beach, SC      | 1,600       | 6 SMS#         |
| *8)*    Bass Pro Outdoor                   | 2006     | Springfield, MO       | 500         | 3 SMS          |
| *9)*    Bass Pro Outdoor**                 | 2006     | San Antonio, TX       | 500         | 2 SMS          |
| *10)*  Bass Pro Outdoor**                  | 2007     | Mesa, AZ              | 500         | 2 SMS          |
| *11)*  Bass Pro Outdoor                    | 2007     | Rancho Cucamonga, CA  | 500         | 2 SMS          |
| *12)*Wing Warehouse Sports Bar & Grill | 2007     | Akron, OH             | 1200        | 4 SMS          |
| *13)*  Incredible Pizza**                  | 2007     | Euless, TX (Dallas)   | 1200        | 4 SMS*#        |
| *14)*Incredible Pizza**                    | 2007     | War Acres, OK         | 1200        | 4 SMS*#        |
| *15)*  Incredible Pizza**                  | 2007     | Pasadena, TX          | 500         | 2 SMS*         |
| *16)*  Incredible Pizza**                  | 2007     | Houston, TX           | 1200        | 4 SMS*         |
| *17)*Miramar Speed Circuit**               | 2007     | San Diego, CA         | 500         | 1 SMS*         |
| *18)*Carnival Triumph**                    | 2007     | Carnival Cruise Lines | 500         | 2 SMS*         |
| *19)*Rapid City**                          | 2007     | Rapid City, SD        | 1200        | 2 SMS*         |
| *20)*Bass Pro Outdoor**                    | 2008     | Denham Springs, LA    | 500         | 2 SMS*         |
| *21)*  Charlotte Simulated Speedway        | 2008     | Charlotte, NC         | 4000        | 4 SMS*         |

 

*Mobile Units (40 Simulators):*

 

| *Buyer***                                | *Year*** | *Market*            | *Simulators* |
|------------------------------------------|----------|---------------------|--------------|
| *1)*    DaimlerChrysler                  | 2005     | European Auto Shows | 2 SMS        |
| *2)*    H&H Motorsports/IMTS**       | 2006     | Mobile Experience   | 2 Reactors   |
| *3)*    Florida Simulated Racing Network | 2006     | Mobile Experience   | 4 Reactors   |
| *4)*    Exhibit Enterprises (Dodge)      | 2006     | Mobile Experience   | 4 Reactors   |
| *5)*    Exhibit Enterprises (Dodge)      | 2006     | Mobile Experience   | 4 Reactors   |
| *6)*    DGI, Inc (Nextel) **             | 2006     | Mobile Experience   | 6 Reactors   |
| *7)*    DGI, Inc (Toyota)                | 2006     | Mobile Experience   | 4 Reactors   |
| *8)*    DGI, Inc (Nextel, Toyota)        | 2007     | Mobile Experience   | 14 Reactors  |

 

 

 

15

*Sales of Simulators (85 Simulators):*

 

| *Buyer***                              | *Year*** | *Market***                            | *Simulators*** |
|----------------------------------------|----------|---------------------------------------|----------------|
| *1)*   Gurnee Mills                    | 2004     | Chicago, IL                           | 6 SMS!!        |
| *2)*   Concord Mills                   | 2004     | Charlotte, NC                         | 12 SMS!!       |
| *3)*Opry Mills**                       | 2004     | Nashville, TN                         | 10 SMS!!       |
| *4)*    I-Vision Tech.                 | 2004     | Abu Dhabi, UAE                        | 2 SMS          |
| *5)*    I-Vision Tech.                 | 2005     | Abu Dhabi, UAE                        | 4 SMS          |
| *6)*    Ft. Gordon                     | 2005     | Ft. Gordon, GA                        | 2 SMS          |
| *7)*    Fun City                       | 2005     | Burlington, IA                        | 1 SMS          |
| *8)*    DaimlerChrysler                | 2005     | US Auto Shows                         | 2 SMS          |
| *9)*    Gate A Sports                  | 2006     | Cleveland, OH                         | 5 SMS          |
| *10)*  Skycoaster of Florida           | 2006     | Kissimmee, FL                         | 6 SMS          |
| *11)*  Vacationland F.E.               | 2006     | Brainerd, MN                          | 4 SMS          |
| *12)*  NASCAR SpeedPark                | 2006     | Concord, NC                           | 3 Reactors     |
| *13)*  George P. Johnson & Company | 2007     | Auburn Hills, MI (Shanghi experience) | 2 Reactors     |
| *14)*Prime Time FEC                    | 2007     | Abilene, TX                           | 3 SMS          |
| *15)*Miramar Speed Circuit**           | 2007     | San Diego, CA                         | 1 SMS*         |
| *16)*Rapid City**                      | 2007     | Rapid City, SD                        | 2 SMS*         |
| *17)*Charlotte Simulated Speedway**    | 2008     | Charlotte, NC                         | 4 SMS*         |

 

*Sales of Simulators (continued):*

 

| *Buyer***          | *Year*** | *Market***                 | *Simulators*** |
|--------------------|----------|----------------------------|----------------|
| *18)*Road Story**  | 2008     | Austin, TX                 | 4 SMS*         |
| *19)*  Roltex      | *        | Moscow, Russian Federation | 8 SMS*         |
| *20)*  Tonne Mgmt. | *        | Wisconsin Dells, WI        | 4 SMS*         |

 

# Denotes assets sold to Race Car Simulation Corporation with no current revenue stream to Company

* Denotes that simulators are not yet installed

!!Denotes site that CFL has vacated and Company is negotiating for buy back of simulators

 

The balance of the 192 SMS simulators built since inception are at the Company’s warehouse or Elan Motorsports Technologies where they are built.  The Company has built a total of 44 Reactor simulators.

 

**Review of Consolidated Financial Position**

 

**Cash:**  The Company had $133,635 in cash as of September 30, 2007, compared with $216,323 at December 31, 2006, a decrease of $82,688.  This decrease in the company’s position of cash during the first nine months of 2007 was due principally to payments to vendors and general operating expenses.  See further discussion under the “Liquidity and Capital Resources” section below.

 

**Trade Accounts Receivable:**  At the year ending December 31, 2005, the Company established a reserve of $245,254 for a portion of the debt owed the Company by Checker Flag Lightning, LLC.  The Company continues to pursue the collection of the debt owed the Company by Checker Flag Lightning, LLC, and there is disagreement between the parties as to the amount due.

 

**Inventory:**  At September 30, 2007, inventory increased by $69,343 from December 31, 2006 levels due primarily to the reclassification of simulator parts in non-depreciated fixed assets to simulator inventory held for sale.  Simulators in inventory increased by $81,029 from December 31, 2006, levels to $321,855 at September 30, 2007.  Merchandise inventory decreased by $11,686 from December 31, 2006, levels during the nine month period ending September 30, 2007.    

 

 

16

**Notes Payable:**  On September 30, 2007, the Company had an aggregate balance of $3,599,519 for Notes Payable.  The balance consisted of $50,000 in related party agreements, $600,000 on the Ropart Note Payable, $1,411,942 on the 2004 Race Car Simulator Corporation (“RCS”) borrowing, $122,500 on the 2005 Agreement, $721,636 on the 2006 Agreements, $474,039 in the 2007 Agreements and $219,402 on other agreements.  

 

On March 29, 2006, Perfect Line and MOAC Mall Holdings, LLC, the Mall of America landlord, agreed to a settlement agreement whereby Perfect Line signed a promissory note totaling $294,652 payable in five (5) quarterly installments, with the first payment of $78,471 made on February 28, 2006, and payments of $54,045 to be made beginning July 14, 2006 and ending July 15, 2007.  The $54,045 payments for 2006 were made on July 14 and November 15.  See Note 6, Subsequent Events.

 

On July 14, 2006, the Company entered into Note and Warrant Purchase and Security Agreements with ten (10) investors in a private placement which is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder.  The Notes, totaling $950,000,were issued by Perfect Line, will be fully paid down July 17, 2010, and bear interest at a rate of 16% per annum (increased from 15% on September 21, 2007) for the total interest amount over the four year period of $326,194.  The principle balance of the notes on September 30, 2007, is $723,530.  Each note came with an option to purchase common shares of the Company equal to two and one half times the amount of notes purchased divided by the exercise price of the option.  The principle and interest on the Notes are payable weekly over a four year term and are secured by a first security interest in20 of the simulators owned by Perfect Line.

 

On April 12, 2007, the Company entered into a Mutual Release and Settlement Agreement with Mall of Georgia, LLC.  The terms of the agreement released the Company from any future lease obligations at the site and set the financial settlement at $194,660, payable in six (6) installments between May, 2007 and May, 2008.  $95,580 is directly attributable to Perfect Line with the remainder of the note attributable to unpaid rent due from lease assignee, Checker Flag Lightning, LLC.  See Note 6, Subsequent Events.  The Company has filed a Motion for Partial Summary Judgment against Checker Flag Lightning, LLC in the amount of $357,352.  See Part II, Item I, Legal Proceedings for more details. 

 

On September 21, 2007, the Company entered into Note and Warrant Purchase and Security Agreements with ten (10) investors in a private placement which is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder.  The Notes, totaling $475,000, were issued by Perfect Line, will be fully paid down September 13, 2011 and bear interest at a rate of 16% per annum for the total interest amount over the four (4) year period of $167,477.  The principle balance of the notes on September 30, 2007, is $472,661.  Each note came with an option to purchase common shares of the Company equal to two and one half times the amount of notes purchased divided by the exercise price of the option.  

 

**Deposits on Simulator Sales:**  During the nine month period ending September 30, 2007, the Company recorded all or a portion of three simulator sales transactions.  This activity resulted in the decrease of deposits on simulator sales of $16,233 to $1,002,860 as compared to the balance at December 31, 2006.

 

**Other Liabilities:**  Accounts payable, accrued payroll and payroll taxes, sales taxes payable, unearned revenue, and other accrued expenses fluctuate with the volume of business, timing of payments, and the day of the week on which the period ends. 

 

 

17

**Review of Consolidated Results of Operations**

 

***THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006***

 

**Revenues:**  Revenues are comprised primarily of Company store sales, revenue share sales, and simulator leases and sales. 

 

Revenues for the three months ended September 30, 2007, increased by $135,770 or 14.9% to $1,056,796 from $921,026 for the comparable period in 2006. This was the result of increased store sales and simulator sales in the three month period ending September 30, 2007.  

 

**Cost of Sales:**  Cost of sales as a percentage of total revenues was 4% and 12% for the three months ended September 30, 2007 and 2006, respectively. Cost of sales decreased $71,774 or 65.7% to $37,445 for the three months ended September 30, 2007, from $109,219 for the comparable period in 2006. The primary reason for the decrease in cost of sales was due to realized cost being less than estimated in the second quarter of 2007. 

 

**Gross Profit:**  Gross profit as a percentage of total revenue was 96% and 88% for the three months ended September 30, 2007 and 2006, respectively. Gross profit increased $207,544 or 25.6% to $1,019,351 for the three months ended September 30, 2007, from $811,807 for the comparable period in 2006. The increase in gross profit margin was primarily associated with realized cost being less than estimated in the second quarter of 2007. 

 

**General and Administrative:**  General and administrative expenses decreased $170,263 or 17.4% to $807,957 for the three months ended September 30, 2007, compared to $978,220 for the comparable period in 2006. The primary reason for the decrease was a $168,255 decrease in other operating expenses. 

 

**Operating Profit:**  The Company’s profit from operations during the three months ended September 30, 2007 was $211,394 compared to an operation loss during the three months ended September 30, 2006 of $166,413. 

 

**Interest Expense:**  Interest expense was $172,103 and $151,172 for the three months ended September 30, 2007 and 2006, respectively. 

 

**Net Profit:**  The Company’s net profit for the three months ended September 30, 2007, was $39,291 compared to a net loss of $317,585 for the same period in 2006. 

 

***NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006***

 

**Revenues:**  Revenues are comprised primarily of Company store sales, revenue share sales, and simulator leases and sales.

 

Revenues for the nine months ended September 30, 2007, decreased $278,194 or 8% to $3.321 million as compared with $3.600 million for the comparable period in 2006. This was the result of a combination of a strong simulator sales in the nine month period ending March 30, 2006, and soft sales in the nine month period ending September 30, 2007.  Management believes that the timing of the sales transactions will balance out over the course of the next six months, but there can be no assurances.

 

 

18

**Cost of Sales:**  Cost of sales as a percentage of total revenues was 19% and 15% for the nine months ended September 30, 2007 and 2006, respectively. Cost of sales for the nine months ended September 30, 2007, increased by $64,414 or 12% to $620,331 compared with $555,917 for the comparable period in 2006. The primary reason for the increase in cost of sales was an increase of $19,769 in Company store merchandise and a $44,646 increase in simulator related expenses. 

 

**Gross Profit:**  Gross profit as a percentage of total revenues was 81% and 85% for the nine months ended September 30, 2007 and 2006, respectively. Gross profit was $2.701 million for the nine months ended September 30, 2007, as compared to $3.044 million for the nine months ended September 30, 2006, a decrease of $342,608 or 11.3%. The decrease was primarily the result of lower simulator sales in the first three quarters of 2007.  Management believes that the timing of the sales transactions will balance out over the course of the next six months, but there can be no assurances. 

 

**General and Administrative:**  General and administrative expenses decreased $616,623 or 19% to $2.630 million for the nine months ended September 30, 2007, compared to $3,247 million for the same period in 2006. The primary reasons for the decrease in general and administration was a $178,749 decrease in payroll related expenses, an $9,323 decrease in occupancy expenses, and a net decrease in other operating expenses of $428,551.  The decrease in other operating expenses is mainly attributed to decreases in Research & Development of $114,569, Credit Acquisition Fee of $95,000, Depreciation of $86,255, Outside Services of $68,558 and Insurance of $32,024.  

 

**Operating Profit:**  The Company had a $70,939 profit from operations during the nine months ended September 30, 2007 compared to a $203,076 loss for the same period in 2006. 

 

**Interest Expense:**  Interest expense was $461,396 and $400,452 for the nine months ended September 30, 2007 and 2006, respectively. 

 

**Income Taxes:**  For the nine months ended September 30, 2007, the Company’s income tax expense was minimal because of the Company’s net operating loss carryforwards. For the nine months ended September 30, 2006, the Company did not record a provision for income taxes. No income tax is due for this period because the Company has net operating loss carryforwards from prior periods that fully offset the tax provision. 

 

**Net Loss:**  The Company’s posted a net loss of $390,457 and $603,528 for the nine months ended September 30, 2007 and 2006, respectively. 

 

**Liquidity and Capital Resources**

 

The primary source of funds available to the Company are receipts from customers for simulator and merchandise sales in its two owned and operated racing centers, percentage of gross revenues from simulator races and minimum guarantees from revenue share and lease sites, the sale of simulators, proceeds from equity offerings including the $2,610 million received in August 2002, proceeds from debt offerings including the $700,000 in Secured Bridge Notes and warrants issued in March 2003, the $604,000 in net proceeds from Notes and options issued between February and June, 2004, the additional loan of a net $100,000 from one of the existing Bridge Loan note holders, $122,000 from the 2005 Note, net proceeds of $855,000 borrowed in September of 2006, net proceeds of $427,500 borrowed in September of 2007, loans from shareholders, credit extended by vendors, and possible future financings.  

 

 

 

19

On December 31, 2004, March 31, 2005 and April 15, 2005, the Company entered into three Asset Purchase Agreements with Race Car Simulation Corp. (“RCSC”) pursuant to which it sold forty-four (44) of its race car simulators that were located in existing revenue share locations, or had been installed in new revenue share sites.  The sale is accounted for as a borrowing in accordance with the guidance provided in paragraphs 21-22 of SFAS 13.  While this transaction generated an aggregate purchase price of $2,856,600, it also depleted monthly revenue share payments to the Company generated by the simulators that were sold.  As of this filing, the net proceeds of $1,874,708 from the three sales transactions for the sale of forty-four (44) simulators to RCSC have been depleted.  Management intends to continue to contract with revenue share and/or lease partners in a timely manner and install simulatorswithin its inventory to replenish the cash flow lost from the forty-four (44) simulators that were sold, although there can be no assurances.  RCSC has filed a complaint against National Tour, Inc. and its chief executive officer, Johnny Capels, personally.  RCSC claims that National Tour owes the company at least $193,000 in lease payments plus interest and other costs under the lease agreements between the parties.  The lease agreements involve twelve (12) of the Company’s simulators which were part of the forty-four (44) considered a “borrowing” under GAAP guidelines, and may be a contingent liability for the Company under the terms of its guarantee to RCSC under the asset purchase agreement.   The Company has an obligation under their agreement with RCSC to guarantee certain contracted revenue share or lease payments through 2007, and also has the obligation to find new revenue share or lease partners for the RCSC simulators.  The Company is in the process ofremoving eight SMS simulators from the Syracuse, NY site to Incredible Pizza sites in Oklahoma City, OK and Dallas, TX (four in each site).  The Company and RCSC are in discussions of how best to resolve the guaranteed payments due under their agreement.

 

The Company believes that it has generated a significant interest in its simulators, and that some combination of revenue share agreements, lease agreements and simulator sales agreements with both the original SMS simulator and the new Reactor simulator will be sufficient to fund the daily operations of the business until a larger scale, multi-site virtual league format can be established, although there can be no assurances. Current prospects include family entertainment centers, bowling alleys, cruise ships, sports bars and large retailers.    

 

Management is optimistic that the new Reactor simulator will be attractive to customers seeking a lower priced simulator with greater mobility and portability.  The Reactor simulator debuted at the IAAPA convention in mid-November, 2005, and 44 Reactor simulators have been manufactured since that time. Management is also encouraged by the initial interest in, and the potential profitability of, the mobile application of the new Reactor, simulator although there can be no assurance.

 

The Company is pursuing some form of debt or equity financing sufficient to complete its development of the multi-site league play, and there is no assurance that such funding will be available, or available on terms acceptable to the Company.

 

During the nine months ending September 30, 2007, the operating activities of the Company used net cash of $330,152 compared to net cash used of $976,339 for the comparable period in 2006. The drivers for the decrease in cash used from operations can be attributed to the increase in prepaid expense, the increase in accounts payable and the amortization of the Dolphin financing agreement.

 

During the nine months ending September 30, 2007, the Company used $51,753 of net cash in investing activities compared with $279,273 of net cash used in investing activities during the comparable period in 2006. The decrease in cash from investing activities is primarily related to the purchase of simulators.

 

During the nine months ending September 30, 2007, the Company generated $299,217 of cash from financing activities compared with $1,132,274 of cash generated during the comparable period in 2006.  The decrease from financing activities is primarily related to the payments on notes.

 

 

20

Cash flow from all sources (operations, investing activities and financing activities) was insufficient to fund the company during the nine months ending September 30, 2007, and resulted in an $82,688 reduction in the Company’s cash position.  This compares with $123,338 in cash reduction for all sources for the period ending September 30, 2006.

 

The Company has funded its retained losses through the initial investment of $650,000 in May 2001, $400,000 of capital contributed in February 2002, approximately $2.610 million received in August 2002, loans from related parties including net proceeds of $687,500 received in March, 2003, and net proceeds received between February 2004 and June 2004 totaling $604,000, $122,500 in loan proceeds from the sale of the 2005 Notes between October and November, net proceeds of  $845,000 in loan proceeds from the sale of the 2006 Notes in July, net proceeds of $855,000 borrowed in September of 2006, net proceeds of $427,500 borrowed in September of 2007, $1.003 million received in the form of deposits for the placement of race car simulators in revenue share locations, or for the future purchase by third parties of race car simulators, and credit extended by vendors.

 

As of September 30, 2007, the Company had cash totaling $133,635 compared to $216,323 at December 31, 2006. Current assets totaled $778,968 at September 30, 2007 compared to $726,018 on December 31, 2006. Current liabilities totaled $4,264,289 on September 30, 2007 compared with $3,843,284 on December 31, 2006.  As such, these amounts represent an overall decrease in working capital of $368,055 for the nine months ending September 30, 2007. 

 

**ITEM 3.  INTERNAL CONTROLS AND PROCEDURES**

 

The Principal Executive Officer (“PEO”) and the Principal Financial Officer (“PFO”) of the Company (currently one individual) have evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-14 of the Exchange Act) within 90 days prior to the filing of this report. Based on that evaluation, the PEO and PFO have concluded that the Company’s disclosure controls and procedures are adequate and effective. There have been no significant changes in the Company’s internal controls, or in factors that could significantly affect internal controls, subsequent to the most recent evaluation of such controls.

 

 

21

 

**PART II**

 

**ITEM 1. LEGAL PROCEEDINGS** 

 

From time to time, the Company may be party to various legal actions and complaints arising in the ordinary course of business.  The Company’s subsidiary Perfect Line, Inc. filed a complaint in the US District Court Southern District of Indiana on December 6, 2006, against Checker Flag Lightning, LLC (“CFL”) and Mike Schuelke, seeking a Declaratory Judgment, Injunctive Relief and Damages for failing to make the required payments (at least $559,119) under certain lease agreements between CFL and Perfect Line. On April 18, 2007, the Company filed a Motion for Partial Summary Judgment in the amount of $357,372 against CFL on Counts II and VI of the Complaint (amounts that are owed since January 1, 2006).  CFL filed its response to the Summary Judgment and did not dispute the amounts due to Perfect Line; however the case has been stayed pending the outcome of the Bankruptcy Proceedings as described below.  

 

A Petition for Involuntary Bankruptcy was filed by Perfect Line against CFL on June 11, 2007.  CFL filed a motion to dismiss the case based upon an insufficient number of creditors.  The Michigan Court has allowed more time for additional creditors to join the Petition, so the Petition remains pending.  The Involuntary Petition was granted and a trustee has been appointed, and is proceeding to administer the estate.  Perfect Line has a first position security interest in 6 SMS simulators at the Gurnee Mills location related to a $400,000 note with CFL, and has made an offer to the bankruptcy trustee for 22 SMS simulators that were in CFL sites.  Another 8 SMS simulators that the Company owns are in the Jordan Creek site, and will be installed in future revenue producing sites.

 

Checkered Flag Lightning, LLC (“CFL”) is a lease assignee of Perfect Line for the Riverchase Galleria racing center in Birmingham, Alabama.  Since CFL recently vacated this space, the landlord for this space has recently informed Perfect Line of CFL’s failure to pay an amount due at the end of 2006 of $204,380.  Approximately half of this amount was a previous Perfect Line obligation that was to be paid by CFL under the terms of the revenue share agreement between the parties, and the other half are recent CFL defaults.  No complaint has been filed in this matter, and the parties are attempting to negotiate reasonable settlement terms for both parties, although there can be no assurance.  The landlord did release the 8 SMS simulators and related assets that were in this mall site to the Company, and they have been removed and stored in the Company’s warehouse for future installation.

 

As of the filing of this Form 10-QSB, the Company is not aware of any material legal actions directed against the Company.  

 

**ITEM 2.  CHANGES IN SECURITIES**

 

None, not applicable.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

None, not applicable.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None, not applicable.

 

**ITEM 5.  OTHER INFORMATION**

 

None, not applicable.

 

 

22

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

| A. | Exhibits. |
|----|-----------|

 

|   | 3(i) | Articles of Incorporation 1 |
|--------|------|-----------------------------|

|   | 3(ii) | By-Laws1 |
|--------|-------|----------|

|   | 10.1 | Form of Secured Bridge Notes 2 |
|--------|------|--------------------------------|

|   | 10.2 | Form of Procurement Contract 3 |
|--------|------|--------------------------------|

|   | 10.3 | Form of Master Revenue Sharing Agreement 3 |
|--------|------|--------------------------------------------|

|   | 10.4 | Asset Purchase Agreement with Race Car Simulation Corporation, a portfolio company of Dolphin Direct Equity Partners, LP 4 |
|--------|------|----------------------------------------------------------------------------------------------------------------------------|

|   | 10.5 | Asset Purchase Agreement with Checker Flag Lightning, LLC (“CFL”), a Michigan limited liability corporation 5 |
|--------|------|-------------------------------------------------------------------------------------------------------------------------|

|   | 10.6 | Form of 2006 Secured Promissory Note6 |
|--------|------|---------------------------------------|

|   | 10.7 | Form of 2006 Common Stock Purchase Warrant6 |
|--------|------|---------------------------------------------|

|   | 10.8 | Form of 2007 Secured Promissory Note6 |
|--------|------|---------------------------------------|

|   | 10.9 | Form of 2007 Common Stock Purchase Warrant6 |
|--------|------|---------------------------------------------|

|   | 11.1 | Computation of Earnings (Loss) Per Share |
|--------|------|------------------------------------------|

|   | 21.1 | Subsidiaries |
|--------|------|--------------|

|   | 31.1 | Certification of William R. Donaldson as Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Security Exchange Act of 1934. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 32.1 | Certification of William R. Donaldson as Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
|--------|------|------------------------------------------------------------------------------------------------------|

|   | 32.2 | Certification of William R. Donaldson as Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350. |
|--------|------|--------------------------------------------------------------------------------------------------------------------|

 

|   | 1)  Incorporated by reference from Form 10-QSB filed on November 14, 2002 |
|--------|---------------------------------------------------------------------------|

|   | 2)  Incorporated by reference from Form 8-K filed on March 13, 2003 |
|--------|---------------------------------------------------------------------|

3)  Incorporated by reference from Form 10-QSB filed on May 17, 2004

|   | 4)  Incorporated by reference from Form 8-K filed on January 6, 2005 |
|--------|----------------------------------------------------------------------|

|   | 5)  Incorporated by reference from Form 8-K filed on January 6, 2006 |
|--------|----------------------------------------------------------------------|

|   | 6)  Incorporated by reference from Form 10-KSB filed on March 30, 2006 |
|--------|------------------------------------------------------------------------|

 

 

| B. | Reports on Form 8-K. |
|----|----------------------|

 

|   | None |
|--------|------|

 

 

23

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP.**

 

|   | Date: November 19, 2007 | By: | */s/ William R. Donaldson* |
|--------|-------------------------|-----|----------------------------|

*-----------------------------------------------*

William R. Donaldson

Chairman of the Board and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 

 

|   | Date: November 19, 2007 | By: | */s/ William R. Donaldson* |
|--------|-------------------------|-----|----------------------------|

*-----------------------------------------------*

William R. Donaldson

Chairman of the Board and Chief Executive Officer

|   | (Principal Executive Officer) |
|--------|-------------------------------|

 

|   | Date: November 19, 2007 | By: | */s/ William R. Donaldson* |
|--------|-------------------------|-----|----------------------------|

*-----------------------------------------------*

William R. Donaldson

Chairman of the Board and Chief Executive Officer

|   | (Principal Financial Officer) |
|--------|-------------------------------|

 

 

 

24

**EXHIBIT INDEX**

 

Exhibits:

 

|   | 10.6 | Form of 2006 Secured Promissory Note |
|--------|------|--------------------------------------|

|   | 10.7 | Form of 2006 Common Stock Purchase Warrant |
|--------|------|--------------------------------------------|

|   | 10.8 | Form of 2007 Secured Promissory Note |
|--------|------|--------------------------------------|

|   | 10.9 | Form of 2007 Common Stock Purchase Warrant |
|--------|------|--------------------------------------------|

|   | 11.1 | Computation of Earnings (Loss) Per Share |
|--------|------|------------------------------------------|

|   | 21.1 | Subsidiaries |
|--------|------|--------------|

|   | 31.1 | Certification of William R. Donaldson as Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Security Exchange Act of 1934. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 32.1 | Certification of William R. Donaldson as Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
|--------|------|------------------------------------------------------------------------------------------------------|

|   | 32.2 | Certification of William R. Donaldson as Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350. |
|--------|------|--------------------------------------------------------------------------------------------------------------------|

 

 

 

25